This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

November 29, 2012

10 Best & Worst State Pension Systems

AdvisorOne focuses on the five best and five worst states Morningstar studied when it comes to the states' funding ratios of their pensions

The majority of states are “adequately managing” their pension liabilities, Morningstar found in a report released this week. The company analyzed current data for pension plans in all 50 states to determine how able they were to meet obligations.

While states’ pension health varies widely, the company found 29 states have a pension funded ratio of at least 70%, the level at which Morningstar considers a pension fiscally sound. Thirteen states have a funded ratio above 80% and seven are able to pay 90% of their obligations.

Furthermore, eight states have a UAAL per capita of under $1,000. In fact, Wisconsin has a UAAL per capita of less than $100 and has done so for the five years of data provided in the report. Morningstar noted that the UAAL per capita and the funded ratio are roughly correlated. Morningstar also found that most states have seen their funded ratio fall while their UAAL per capita rises.

Morningstar found that 21 states were seriously underfunded, with a funded ratio of less than 69% and 20 with a UAAL per capita that is over $3,000.

Morningstar noted that it’s difficult to compare pensions directly because they differ in the types of benefits they offer and who is contributing to the plan. Plans may be defined benefit, defined contribution or a hybrid, and may be a single-employer or multi-employer plan. Morningstar found that multi-employer plans can inflate liabilities.

Morningstar argued that pension systems, especially multi-employer plans, need more transparency. Sometimes the plan documents don’t even specify whether the state is a contributor to a plan or simply acts as a fiduciary.

The good news, Morningstar said, is that pensions’ fiscal health changes slowly, and struggling plans are often identified years before they suffer substantial stress on their funding. Investors should take note of plans that have a significant unfunded liability, a funded ratio that is low or falling, high UAAL per capita, annual contributions that are lower than the required level or that increase quickly, and pension costs that make up a significant portion of government spending.

Please continue to find out the 10 Best & Worst State Pension Systems:

ThinkAdvisor's TechCenter is an educational resource designed to give you a competitive edge by keeping you abreast of new tech innovations and need-to-know information that can be applied to your business.